Rent Ceiling: Meaning, Pros and Cons, Example (2024)

What Is a Rent Ceiling?

The term “rent ceiling” refers to the maximum amount of rent a landlord is allowed to charge a tenant. Rent ceilings are a form of rent control and are usually set by law, limiting how high the rent can go in a specified area at any given time. Limits are designed to protect tenants by preventing landlords from overpricing their properties.

Studies have shown that rent ceilings reduce the investment in rent-controlled properties, causing the overall housing stock to decay. Rent ceilings also reduce the tax revenue for a municipality with rent ceilings because of the decrease in property values.

Understanding Rent Ceilings

Rent control has been in effect in the United States since the early 20th century as a way to protect the public from housing shortages and highly inflated rental prices. Rent control laws continue to be enacted today by local governments and, in some cases, states. They cover several key aspects of how rental properties are treated, including how much rent landlords can charge their tenants, as well as the amount by which they can increase that rent and when it can be done.

Landlords must register their properties through the local rent control board by submitting regular rent rolls in areas where the law is in effect. The rent control board determines the maximum amount of rent based on the location, size, and condition of the property, along with any other pertinent information, such as the state of the economy. The board also decides the rate of allowable increase—if any—each year.

Rent control laws—including the enforcement of rent ceilings—are prominently exercised in densely populated areas where rents are high and affordable housing is scarce or hard to obtain. As noted above, these laws are designed to help keep housing affordable for tenants—especially for people who have low to moderate levels of income, those on fixed incomes, older adults, and those with different abilities.

These laws, though, are not enforced uniformly throughout the United States. In fact, only 182 local governments have rent control laws with rent ceilings in place—all of which are in California, New York, New Jersey, Maryland, and Washington, D.C. Oregon enacted a state-wide rent control law in 2019—the first state to do so Thirty-seven states actually forbid their municipalities from enacting rent control laws.

Economics of Rent Ceilings

Many economists question the effectiveness of rent ceilings. They state that these laws have no effect if the equilibrium price is below the ceiling. If the ceiling is set below the equilibrium level, however, then a deadweight loss is created. This happens when supply and demand are out of balance. Other problems arise in the form of black markets, search time, and fees.

Economists are fairly unifiedin the conclusionthat rent controls are destructive and clash with the concept of free markets. In a 2021 study of the effects of the passage of rent control in St. Paul, Minnesota,rent control caused the property values to decrease by 6-7%, for an aggregate loss of $1.6 billion. The tenants that gained the most from the rent control policy had higher incomes and were most likely to be white, while the owners who were negatively impacted were most likely to be minorities and had lower incomes.

Advantages and Disadvantages of Rent Ceilings

Advantages

Rent is oftenveryhigh in some major cities. New York City, for example, has some of the highest-priced properties in the United States, making it nearly impossible for people to afford rent. Local governments can step in to try to rectify this situation—especially for residents who can’tafford market-pricedapartments.

Rent ceilings and other forms of rent control can protect the interests of tenants who may otherwise be forced to pay high rents charged by unscrupulous landlords. Rent laws also, according to the Brookings Institute, protect low-income tenants who have developed “neighborhood-specific capital, such as a network of friends and family, proximity to a job, or children enrolled in local schools,” who might otherwise be displaced by a sudden rent increase.

Disadvantages

However, artificially reducing prices through rent ceilings increases the demand for properties with rent ceilings, thereby decreasing the available supply. That’s because a rent ceiling increases the number ofpeople who are actually able to pay for apartments.

As noted above, rent ceilings may also give rise to black markets. If a prospective tenant offersto pay $100 to $150 extra for rent, for example, they may be able to skip a waiting list for a rent-controlled apartment. The only catch: The extra rent would be paid separately as cash, so it remains off the books.

Economists also say that rent control diverts newinvestment, which would otherwise have gone to rental housing and greener pastures—greener in terms of consumer needs. They believe that it leads to housing deterioration, fewer repairs,and less maintenance. When rent control is removed, it boosts the values of non–rent-controlled properties as well.